Interest Only Mortgage Time Bomb Warning from the CML

By: Kavinesh_A

The Council of Mortgage Lenders (CML) has provided a fresh warning that millions of homeowners who had taken out a Interest only mortgage to purchase their home many years ago are now facing the prospect of losing their home when there mortgage product reaches it’s expiry. The debate of an Interest only mortgage ticking time bomb has been rumbling on for many years but things have become more apparent this week as the Council of Mortgage Lenders highlighted that up to 1.9 million homeowners are going to start reaching the end of their mortgage lifespan and asked to pay the outstanding balance of what they owe. Unfortunately for many people who took out their mortgage 20 years ago they are now approaching retirement age and therefore seen as being too old to take out another mortgage product.

Nowadays, with many first time buyers joining the property ladder far later in life the issue of mortgage terms expiring presents a further problem. Restrictions in the length of mortgage products offered start occurring for buyers at the age of 45 who may start to find that they only have access to shorter mortgage terms and will therefore have higher monthly payments. Furthermore, banks are increasingly applying stricter lending criteria and the days of cheaper interest only mortgages are almost over with only around a fifth of new mortgages being interest only.

So how did this all begin

Interest only mortgages started to become popular during the 90’s with many home buyers preferring the option to only service the interest portion of their mortgage each month and in turn having much smaller monthly mortgage payments. The problem of being left with outstanding debt once the mortgage term expired was also addressed at the time with the offering of an endowment policy which was far cheaper than paying down the capital and would supposedly better invest your money into funds that will be used to pay off the remaining capital at the end of the mortgage term. However, the problem that many face is that their endowment policy hasn’t been as successful as initially intended and isn’t worth enough to cover the outstanding mortgage. The endowment policy problem has been wildly reported in recent years and many people have received compensation for being miss-sold, in fact to such an extent that in 2016 the Financial Ombudsman announced that endowment policy’s where the second most complained about investment product.

For many home buyers mortgage providers insisted that an endowment policy must be connected to the interest only mortgage that was offered at the time. However, this wasn’t always the case and those who solely took out a interest only mortgage are left with the task of having to find the money to pay the entire outstanding loan, for those in this situation what are the options available:

Options available

Sell and Downsize – Unfortunately many homeowners will have to sell their beloved home and downsize. Luckily enough property prices have increased so much over the past 20 years that they should have a good amount of equity that they can use to buy a new home. For those who don’t have much equity and still need to sell their house fast there are companies who allow you to sell for 100% market value and this could be a good route that will satisfy your mortgage lender that you have taken a proactive approach. Whichever way you manage to achieve a sale you will still be forced to move and then use your remaining equity to live in a new area or house that will probably not be as desirable as you have been used to.

Endowment Policy – As mentioned many people who are reaching the end of their mortgage term will have an endowment policy in place but this may not be enough to cover the amount owed. Over recent years over 2 billion has been paid out in compensation claims and the route of claiming compensation for the miss-selling of an endowment policy could be taken. It has been the responsibility of Endowment Policy lenders to issue “High Warning” Letters in good time before the end of the mortgage term and depending on whether or not the policy holder received this warning and how long since the warning letter was received you may or may not be able to claim. The Financial Ombudsmen Endowment policy claim time limits can be seen here.

Equity Release Loan – Rather than selling up and spending your equity on a new property it may be a more comfortable option to apply a equity release charge on your home to pay off the remaining debt. This will be a loan that is paid off when you die and the house is sold. You do initially need to have enough equity in your property to cover the original mortgage loan and also enough to take into account Interest that will accrue over the forthcoming years. Even though you won’t need to make any monthly payments these loans can have a high level of interest and will put a dent into any inheritance that you have intended to pass on.

Alongside these above three options there are other possibilities available that a good financial advisor could recommend if you are faced with this sticky situation.

By Kavinesh

© 2017 Kavinesh - All Rights Reserved

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